Bài giảng Microeconomics - Chapter 7 Efficiency and Exchange

Efficiency and Exchange0What is Chapter 7 about?1I. Market Equilibrium and EfficiencySlide 7 - 22We assume technical, productive efficiencyPareto efficiency – in allocationNo individual can be made better off without one or more other individuals being made worse offNote: “Better off” by own preferencesReallocating resources must harm one or more individuals in order to help anotherEquilibrium property of perfectly competitive marketsMarket Equilibrium and Efficiency3Key Idea - Mutual Benefits of Voluntary ExchangeIf Price = Revenue from transaction to seller= Cost of transaction to buyerAnd if both voluntarily agree to transactionBoth must benefit from exchangeWell being increases – and continues to increase as long as both have an incentive to tradeWhen no further desire to trade – well being at maximumPowerful idea – but limited in application to perfectly competitive markets4Every buyer and seller is a price-taker: No buyer or seller can control the priceImplication: No market participant is “large” in relation to the total size of the market. Equal information about product qualityFull information about what is happening in the marketPerfect competition implies NO economic power. Chapter 9 will study market forms where abuse occurs, and Pareto efficiency is prevented from realizationPerfect Competition5 Some markets are ‘close enough’ to perfect competitionEasier to understand other market forms if one understands perfect competition Perfect competition provides a benchmark for comparisonsWhy Study Perfect Competition if it is Rare in Reality?6II. Economic SurplusSlide 7 - 77Total economic surplusThe sum of all the individual economic surpluses gained by buyers and sellers participating in the marketConsumer SurplusWhat consumers would have been willing to pay minus what they actually did payProducer SurplusWhat producers do get for output minus minimum price they would have been willing to acceptEconomic Surplus8Consumer SurplusEconomic surplus gained by the buyers of a productMeasured by the difference between their reservation price for each unit of the good, and and the price they payProducer SurplusEconomic surplus gained by the sellers of a productMeasured by the difference between the price they receive and their reservation price for each unit of the goodKinds of Surplus9Fig. 7.1A Market in Which Price Is Below Equilibrium Level10Fig. 7.2How Excess Demand Creates an Opportunity for a Surplus-Enhancing Transaction11Fig. 7.3How Excess Supply Creates an Opportunity for a Surplus-Enhancing Transaction12Fig. 7.4A Market with “Digital” Supplyand Demand Curves13Fig. 7.5Consumer and Producer SurplusConsumer surplusProducer surplus14Fig. 7.7Supply and Demand in the Market for Milk15Fig. 7.8Total Economic Surplus in the Market for MilkConsumer surplusProducer surplus16Is Efficiency the Only Goal?‘Efficient’ outcomes - not necessarily ‘good’ Is the resulting income distribution socially acceptable ?Does result satisfy moral / social values ?Issue: to mitigate undesirable effects of efficient market outcomes ? If so, HOW ?Consideration: efficiency enables more surplus to be available to be used for other goals, including mitigation of undesirable outcomes17Equilibrium price and quantity maximize the total economic surplusTotal economic surplus would be lower at any other price and quantity combinationI.E., loss of surplus (economic waste) occurs at any other price and quantity combinationSurplus and Efficiency18III. The Cost of Preventing Price AdjustmentsSlide 7 - 1919Preventing Price Adjustment:Price CeilingsPrice Ceilinglaw or regulation that prevents sellers from charging more than a specified pricereduces total economic surplus some can buy the good at the reduced price. However, the same objective could have been accomplished with less economic waste.20Fig. 7.9Economic Surplus in an Unregulated Market for Home Heating Oil21Fig. 7.10The Waste Caused by Price ControlsQuantity (1000’s of bbl/day)Price ($/bbl)Consumer surplusLost economic surplusProducer surplus0123458101214161820SD22So why do price controls exist?- Redistribution of SurplusNotice that a price control reduces the total amount of economic surplus – and also redistributes the shares of surplus received by sellers and buyersImmediate Issue: Am I better off with a larger share of a smaller pie ?Larger Issue: Without equity in the distribution of income, society may be unable to maximize total economic surplus23Elasticity and Economic SurplusSize of economic surplus depends on elasticity of supply & demandSurplus is larger whenDemand is inelasticSupply is inelasticFor SAME Demand Curve, when supply is more inelastic, price ceilingsCause a smaller reduction in total economic surplusHave a larger redistributive effect24Fig 7.11Economic Surplus in Two Unregulated Housing Markets25How large is Surplus loss, compared to Surplus redistribution ?If Supply or Demand is highly inelasticLittle change in quantity produced when price controls are implementedSmall changes in total surplusLarge changes in shares of surplusWhen Supply and Demand are more elastic, the surplus lost due to price controls is greaterWhat’s the Cost/Benefit Ratio for controls ?Depends on supply & demand elasticities26Fig 7.12Lost Surplus and Redistribution of Surplus Arising from Price ControlsQuantity (1000s of apartments/month)(a)Monthly rent ($/apartment)012345671002003004005006007008009001 000A rental marketin WinipegQuantity (1000s of apartments/month)(b)Monthly rent ($/apartment)012345671002003004005006007008009001 000A rental marketin VancouverProducersurplusRent controlLoss of totaleconomicsurplusConsumer surplusRedistributed surplusDSDSRedistributed surplusConsumer surplusLoss of totaleconomicsurplusProducersurplus27Price FloorsLaw or regulation that prevents buyers from paying less than a specified amountkeeps prices highreduces total economic surplusguarantees those suppliers a minimum price for their product. BUT requires the regulator to take care of the ensuing market surplusExample: European Union Agricultural Policy “Wine Oceans”, “Butter Mountains” – dumped on world markets 28Fig. 7.13Equilibrium in an Unregulated Wheat Market29Fig. 7.14Lost Surplus from Price Supports for WheatLost economic surplus30Fig. 7.15Equilibrium in the Market for Seats on Oversold Flights31IV. Taxes and EfficiencySlide 7 - 3232Taxes and EfficiencyTotal price of a good increases when the government imposes a tax on itImplication: less demand & less supply in equilibriumWho bears the burden of the tax ?depends upon the elasticities of supply and demand33Fig. 7.16The Effect of a Tax on the Equilibrium Quantity and Price of Potatoes3.502.502.5S + taxSD34Fig. 7.17The Effect of a Tax on Sellers of a Good with Infinite Price Elasticity of Supply$10 100S + $100SD$10 0001.92.0Quantity (millions of cars/month)Price ($/car)35Taxes and Economic SurplusDeadweight loss - The reduction in economic surplus that results from taxesA tax distorts the signal (cost benefit) that prices sendChanges cost-benefit based decisiontypically causes some reduction in surplusHow large ? – depends on elasticities36Fig. 7.18The Market for Potatoes Without Taxes37Fig. 7.19The Effect of a $1 Pound Tax on Potatoes3.50S + taxSD2.502.5012345123456Quantity (millions of kg/month)Price ($/kg)38Fig. 7.20The Deadweight Loss Caused by a TaxS + taxSDDeadweight loss caused by tax39Taxes, Elasticity, and EfficiencyDeadweight loss is minimized if taxes are imposed on goods and services whose supply or demand are relatively inelasticIf there is little change in behavior (because either demand or supply is inelastic) then there is little deadweight loss in economic surplus40Fig. 7.21Elasticity of Demand and the Deadweight Loss from a Tax41Fig. 7.22Elasticity of Supply and the Deadweight Loss from a Tax42Taxes, External Costs, and EfficiencyTaxes reduce the equilibrium quantityTo a degree which depends on supply & demand elasticity for that commodityTherefore, taxing activities that people tend to pursue to excess can actually increase total economic surplus (e.g., activities that cause pollution)Taxing goods that would be supplied or demanded anyway has little efficiency cost43End of Chapter SlidesConcept Maps meant for student printouts follow.Concept Map slides are also available in pdf format.Slide 7 - 4444What is Chapter 7 about?45I. Market Equilibrium and Efficiency46II. Economic Surplus47III. The Cost of Preventing Price Adjustments48IV. Taxes and Efficiency49Summary of Chapter 750